Chalet Hotels Ltd (CHALET) Q3 FY23 Earnings Concall Transcript

Chalet Hotels Ltd (NSE: CHALET) Q3 FY23 Earnings Concall dated Jan. 24, 2023

Corporate Participants:

Sanjay Sethi — Managing Director and Chief Executive Officer

Milind Wadekar — Chief Financial Officer

Analysts:

Jinesh Joshi — Prabhudas Lilladher — Analyst

Vikas Ahuja — Antique Stockbroking Limited — Analyst

Sumant Kumar — Motilal Oswal — Analyst

Pradyumna Choudhary — JM Financial — Analyst

Nihal Mahesh Jham — Nuvama — Analyst

Prateek Kumar — Jefferies — Analyst

Rajiv Bharati — DAM Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Third Quarter and Nine Months ended FY ’23 Earnings Conference Call of Chalet Hotels Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Sanjay Sethi, MD and CEO, Chalet Hotels Limited. Thank you, and over to you, Mr. Sethi.

Sanjay Sethi — Managing Director and Chief Executive Officer

Thank you, ma’am. Good evening, ladies and gentlemen. Pleasure to be with you again. Allow me to begin with a couple of updates on some lead indicators that affect the hotel business. Air traffic in the country is still shy of the pre-pandemic levels. Domestic travel continues to be robust. Our recovery in foreign travel is still around the 80% mark for Q3 of FY ’20

In the recent weeks, e-visas have been reactivated by the Government of India, direct flights from Mumbai, Bengaluru and Delhi to US have resumed, a new international airport in Goa has been opened and a new terminal at Bangalore has been inaugurated. All this will create enabling tailwinds for foreign inward travel. The hospitality industry in US and select new markets has shown strong growth in rates and recovery in occupancies. India has also witnessed similar performances in the month of November. The industry report published by Exchanges and ROC [Phonetic] for November indicates 7% to 9% growth in ADRs in India when compared to November 2019.

For Chalet Hotels Limited, Q3 has been the strongest quarter till date with historical best in average room rate, room revenues and F&B revenues. Average room rates grew by 11% from 2019 levels to INR10,168 to clock the highest portfolio average room rates post the global financial crisis. The portfolio average has continued to be over the INR10,000 mark from November till date. The quarter, however, had a bit of a slow start as the month of October had two large festival holidays impacting over half the month of business travel.

A very strong performance in November and the first three weeks of December led to a recovery of — on the back of strong growth of business travel, a robust wedding season and search in MICE events. Occupancy for the quarter was 65%, largely drawn down by optimal performance leading to a RevPAR of INR6,640.

Overall, the hospitality business posted the highest ever revenue at INR2.65 billion, up 6% from Q3 FY ’20 and 19% sequential growth. Room nights and domestic segments were higher by 53% versus 2019, while the foreign traveler recovery is at 70%. The foreigner mix has however gone up from 33% in the previous quarter to 41% in Q3.

The F&B business contributed 34% of the total hospitality revenue, recording a strong performance, backed by robust social and MICE events. F&B revenue grew in the mid-teens during November and December compared to the same period of FY ’20. The quarter was up by 9% as compared to 2019.

EBITDA for hospitality division was INR1.1 billion. We had some lumpy costs under refurbishment raw material in other areas. However, this segment managed a robust 41% EBITDA margin. This in spite of 121 rooms at Powai being out of action due to renovations. The consolidated revenue for the quarter was INR3.2 billion with an EBITDA of INR1.5 billion. The EBITDA margin for the quarter at 45% was encouraging. This is before adjusting for other income and this is the highest revenue and EBITDA for the company till date. Milind will of course take you through some numbers in detail shortly.

A quick update on the project pipeline, starting with the hospitality project pipeline at Westin Powai, now only 29 out of the 600 rooms are left to be renovated, the rest of the renovated rooms are in the process of being handed over to the hotel team as we speak. And the response to the renovated product at the Westin Powai is extremely positive. Handover process for the additional 88 rooms in Novotel, Pune has also commenced at the Westin 2 — the second Westin at Hyderabad Mindspace with 168 rooms, we expect it to be commissioned in phases starting Q1 of FY ’24. The proposed 5-star hotel in Terminal 3 Delhi airport is on schedule.

In the rental and annuity part of the business, the new commercial tower in Bengaluru, handover to the first 10 for fit outs has already commenced for the handover to prospective tenants can be done from March. Work at the mall being converted to office space in Bengaluru has picked up pace and can be handed over to prospective tenants for fit outs in Q1 of FY ’24. The new office start at Powai in Mumbai will be ready to be handed over to prospective tenants from April of this year. So, as you can see, there’s a lot of coming into play of the capex spend that we were having over the last few years, where we start seeing now revenue opportunities starting sometime in the quarter one of next year.

The conversion of the Accenture Learning Center building at Bengaluru to rooms is at design stage. This will add another 140 rooms at the Marriott Whitefield. Our residential project at Koramangala, Bengaluru, we received the final construction approval from BBMP. This allows us to construct as per our revised plan. We also applied for the RERA enrol with revised plans, which will allow us to commence fresh sales. The project work at site is on schedule. We continue to have a strong focus on all our ESG commitments besides what we’ve already shared with you in the past, we recently collaborated with IFC to initiate a forum of human resource leaders to brainstorm and execute strategies to help us improve gender diversity in our hotels.

Ladies and gentlemen, while our operating portfolio is back with strong performances, we are really excited about the expansion plans of the company, which will lead to step up growth for Chalet Hotels in the quarters and years to come. We will keep you updated on the same on a regular basis.

I now hand over to Milind to take you through the numbers for Q3.

Milind Wadekar — Chief Financial Officer

Thank you, Sanjay. Good evening, ladies and gentlemen. Let me now take you through financials in some more details. Starting with hospitality, quarter three saw strong business activity led by Mumbai, Hyderabad and Pune. Three of our properties, JW Marriott at Sahar, Four Points By Sheraton at Vashi and Novotel Pune reported the best quarterly and YTD performances till date.

Revenue from the hospitality segment was at INR2.65 billion for the quarter, higher by 6% from pre-pandemic levels; and EBITDA was at INR1.1 billion, higher by 0.3%, making the performance best till date. The segment reported margins of 41% despite having 120 rooms under renovation and out of action in Powai complex. Long-term strategic initiatives like rebranding of Westin Powai Hotel, addition of rooms at Pune and Hyderabad will give scale of operations and improve margins over the next two quarters.For two of our major cost heads for hospitality, that is payroll cost was at 12% of the revenue in quarter three as compared to 15% in FY ’20 and utility costs as a percentage of revenue was steady at 6% as against 7% for FY ’20.

The food and beverages segment reported healthy growth. Revenue grew by 9% in quarter three FY ’23 to INR894 million versus INR818 million in quarter three FY ’20. Rental and annuity segment contributed 8% of total revenue for the company. The revenue and EBITDA from the segment were at INR244 million and INR198 million for the quarter respectively. On a consolidated basis, reported revenue for the quarter under discussion was at INR3.2 billion, which was higher by 13% as compared to Q3 FY ’20, led by strong recovery in rates and healthy F&B revenue. Revenue adjusted for one-time gain of INR263 million was at INR3 billion, higher by 4% as compared to Q3 FY ’20.

During the quarter, the company has accounted for INR263 million as other income on account of change in the estimated cash flow for redemption of 0% NCPRS with respect to the Koramangala project. Consolidated EBITDA was at INR1.5 billion, up by 22% for the same quarter of FY ’20. EBITDA adjusted for one-time gain was at INR1.2 billion, largely in line with Q3 FY ’20. During the quarter, the company received approval from BBMP for modified development plan for Koramangala project. Accordingly, a reversal of provision for interest in relation to potential cancellation for the flats above 10 floor amounting to INR605 million has been disclosed as an exceptional income.

PBT was at INR1.4 billion versus INR0.2 billion in the sequential quarter. Profit after tax was at INR1 billion and EPS not annualized stood at INR4.99 per share. For nine months, consolidated revenue was at INR8.3 billion, higher by 8% over same period of FY ’20, led by strong performance by the hospitality segment. The effective cost management has resulted in EBITDA growth of 17% to INR3.4 billion. Excluding the one-time gain, the revenue and EBITDA stood at INR8.1 billion and INR3.2 billion and margin stood at 39.2 versus 37.7 in the pre-pandemic same period. PBT was at INR2 billion and not annualized EPS was at INR7.15 for nine months of FY ’23.

Net debt of the company from March ’22 to December ’22 was marginally higher but only INR0.4 billion to INR22.7 billion. While the company spent INR3.3 billion on capex during reported nine months, it was largely funded by internal accruals. Here I would like to highlight that the interest cost for Chalet as of December ’22 was at 8.43%, which has moved up by 91 bps in the first nine months of FY ’23. This is against the backdrop of upward policy rate revision of 225 basis points by RBI during the same period. However, given the recent CPI Trade’s and RBI stance on interest rate scenario is softening. And we believe the interest rate scenario, along with cull of in commodity prices is expected to push corporate earnings going forward.

Capex and funding. The company has capex plan of INR6.1 billion till FY ’24, that is for the next 15 months. This excludes capex for proposed second commercial tower in Powai where we are seeking accruals. Business is well funded with internal accruals at available lines of credit, we have cash and cash equivalent of INR0.8 billion as of December ’22 and INR5.8 billion available lines of credit for general corporate purpose and planned capex. These investments are expected to generate revenue over next three, four quarters and free up the balance sheet. There has been no new subscription from promoters on 0% non-convertible redeemable preference shares during the quarter under review. The total subscription stands at INR2,000 million as of December ’22.

Let’s open the floor for questions and answers.

Questions and Answers:

Operator

Thank you very much, sir. [Operator Instructions] Our first question is from the line of Jinesh Joshi from Prabhudas Lilladher. Please go ahead.

Jinesh Joshi — Prabhudas Lilladher — Analyst

Yeah. Thanks for the opportunity. Sir, I have a question on our pricing strategy. If I look at our ARR, it is roughly 11% higher than the pre-pandemic, days but our occupancy is roughly 10% lower, and hence the recovery in RevPAR is still lagging as such. So, I wanted to understand that are higher prices acting as a deterrent to occupancy and what is our strategy when it comes to achieving a fine balance between both these factors. I basically thought of asking this question is because the price hike which has been taken by us is actually not resulting in the consequent RevPAR jump, so to say, which is still 3% lower.

Sanjay Sethi — Managing Director and Chief Executive Officer

Thank you, Jinesh, for the question. I’m glad you asked that because it gives us an opportunity to clarify. Look, whether we kept the rate less aggressive than where we are or not, I don’t see it would have resulted in higher RevPAR revenue. The periods when you have holidays, especially in our portfolio of assets irrespective of what your pricing is, people don’t come, because the business travel doesn’t happen in those periods. So we’d rather follow the rate route right now. I think this has set a benchmark for rates for the market. It will drive up the rates within the market. And once we have the rate positioning right, occupancies will come.

Having said that, again I’m reiterating that having had — if we had kept the rates any lower, it doesn’t mean that we would have got higher occupancies purely on account of the 18 days that we had the holiday period during October, and then we had a good period from December 1 to December 17. But then after December 17, occupancies fell again due to the Christmas-New Year holidays. So, 14 here, 18 there, 32 days out of 90 odd days gone, irrespective of the rates, occupancies wouldn’t have been up. And you got to remember, the RevPAR is also lower because you’re still counting in the 2019 the full inventory at Powai available, whereas 121 rooms were under renovation at Powai and this RevPAR has come on the back of that reduction in inventory, but we account for it on the RevPAR calculation.

Jinesh Joshi — Prabhudas Lilladher — Analyst

Sure, sir. That was pretty elaborative. My second question is, with respect to the leasing traction for our annuity project, I think we have some 1 million square feet that could come up for leasing in Bangalore in the next two to four monhs as you have highlighted in your opening remarks. So, can you share what is the progress on finding and what proportion of India has actually been reached out so far?

Sanjay Sethi — Managing Director and Chief Executive Officer

Okay, Jinesh, so I think the leasing traction at Bangalore and at Powai shouldn’t be a challenge. Three floors out of the 11 have already been leased out in Bangalore, and the same company is like to take one more floor. As per the leasing update that we have, by December of ’24 — sorry, December of ’23, we would have leased out the whole new IT building. And by March of ’24, even the mall which is to be converted to office, would be leased out. So that’s the estimate that we have from our leasing team.

As far as Powai is concerned, they are expecting a fairly fast ramp up moment the building is ready for a [Indecipherable]. So, no major concerns on the leasing side on any of these two offices. In fact, the recent report that came out, I think, the Economic Times or Times of India, just about four or five days, has given the demand dynamics of office space in various cities in India. And Mumbai has come out strongest — sorry, Bangalore has come out strongest, followed by Mumbai. So these two cities clearly are the top two cities for office space leasing in India today, and both our assets are leased in two [Phonetic] locations.

Jinesh Joshi — Prabhudas Lilladher — Analyst

Sure, sir. One last question from my side. I think, in the opening remarks, you mentioned that the promoter contribution towards the Koramangala remains constant at about INR200 crores. But I think in the result release, we have mentioned that initially INR35 crores has been given out by Directors as an interest-free loan towards the project. So, does it mean that the total promoter contribution right now is at INR235 crores and not INR200 crores?

Milind Wadekar — Chief Financial Officer

Let me comment. Jinesh, promoters have subscribed to preferentials of INR200 crores. They are committed to fund entire project expenditure of Koramangala. Now, we have taken INR35 crores interest-free loans from promoters. So, contribution from promoters as of today total is INR235 crores. But for preferentials, it is INR200 crores, at interest-free loans it is INR35 crores.

Sanjay Sethi — Managing Director and Chief Executive Officer

Both are interest-free, but on the pref share side it is INR200 crores, and the new loan is INR35 crores. This is basically to kick start the project because the project will be self-financing the moment we start our sales process.

Jinesh Joshi — Prabhudas Lilladher — Analyst

Sure, sir. Thank you so much, and all the best.

Sanjay Sethi — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from the line of Vikas Ahuja from Antique Stockbroking Limited. Please go ahead.

Vikas Ahuja — Antique Stockbroking Limited — Analyst

Hello. Yeah, hi. Thanks for the opportunity. Sir, one clarification regarding the previous question. So, you said that despite the pricing strategy, the occupancy would have been same even if you would have given lower pricing to clients, the occupancy would have been 55%. [Technical Issues] with pre-COVID levels during this quarter, we used to do somewhere around 65%, 66%, which is still 10 percentage points below the past. So, is it largely because of the corporate recovery still weak that’s why the occupancy is where it is? And secondly, any color you can give on overall corporate bookings when we can see them going back to pre-COVID levels, maybe somewhere in the second half? Any color around that would be great.

Sanjay Sethi — Managing Director and Chief Executive Officer

Sure. So, look, I think, it’s driven — the occupancy impact was driven by, as I said, the multiple holidays in October and then, of course, the typical, which is an annual phenomena, the second half of December. This time, the holidays has got bunched up in October for both the Diwali and Dussehra, and you can add Ashtami and Bhai Dooj, this and quite a few holidays.

The second thing, on the occupancy side, that was dragging it down was the foreign travel is still not back to full stream. And Marriott Whitefield, which is very heavily relying on foreign travel, has had a slower start in rest of the portfolio. And I want to reiterate again, if we had reduced the prices or kept the prices lower, we would probably not have reached the RevPAR that we have. So, the strategy has actually paid off. I think, to a large extent, this is a long — mid to long-term game and play area that we want to reposition the hospitality industry in India to fair pricing, which is clearly higher rates than where we were in the recent years.

Vikas Ahuja — Antique Stockbroking Limited — Analyst

Sure. Thank you. And one last question. I mean, overall, what we are hearing is that corporate rate negotiation has gone really well for most of the hotels. So, is it fair to assume that pricing next quarter should be actually much better than what we have achieved, which is already all-time high, barring if we look at the current portfolio we have. Is it a fair understanding? And that’s about it. Thanks a lot.

Sanjay Sethi — Managing Director and Chief Executive Officer

What’s going to happen is that the ADR that we experience of 10,000-plus is driven by — whilst there were off periods, there were also peak periods during this period. 1st November to third week of December was high peak period, which meant people went to retail rates to get the rates. The increase in prices for the contracted accounts is clearly higher. As I’ve explained in the last call that we have taken the strategy of staying away from avoiding as much as possible on the last room available to corporates, which allows us to maybe give competitive pricing but not give them rooms on — at high occupancy periods, which will deem that they’ll have to go to retail pricing at that period to book rooms. I think it’s going to pay off our current all indicators point towards improvement [Technical Issues] occupancies should be back in periods when we don’t have holidays.

Vikas Ahuja — Antique Stockbroking Limited — Analyst

Thanks a lot.

Operator

Thank you. [Operator Instructions] Our next question is from the line of Sumant Kumar from Motilal Oswal. Please go ahead.

Sumant Kumar — Motilal Oswal — Analyst

Yeah. Hi, sir. Sir, can you talk about the Bengaluru market, the occupancy in Q3 was lower, so how — what was the key reason and how things are improving there?

Sanjay Sethi — Managing Director and Chief Executive Officer

I think, Bengaluru, if you look at the numbers over here, occupancy for our hotels for this quarter was only 50%. That is again driven largely by holidays in the fact that during Christmas and New Years, foreigners don’t travel, and they turn about [Phonetic] a lot earlier than everyone else. And Bangalore’s reliance on foreign travel is much higher. The fact that it’s now got connected with international flights or direct flights to US, both East Coast and West Coast, we expect that to pick up very sharply. We’re happy that we are able to now reposition the hotel at the INR9,500 price point in the last quarter, which is very close to where we were in Q3 of ’20. And confident that in the coming months and coming quarters, this hotel will do extremely well.

Bengaluru has had dynamics of three or four micro markets that come into play in that city. City Center has a little more perennial business around the year. So, the hotels that are in the City Center area get less affected by dips in values and peak. Then there is a market at the Outer Ring Road, Marathahalli area, Sarjapur area, which again is very heavily relying on IT, but this is the first to pick up when the IT picks up.

And then, there is a Whitefield market where we have the advantage of lesser number of rooms compared to where — the other markets, and we’re taking advantage of the position. And the fourth one is the Electronic City to the East and South Eastern side of the back of Bangalore, which picks up a lot. In our view, we think Bangalore will come back to previous performances very soon, and we are not taking a short view on this, whilst we understand that in the short term, this is dragged [Technical Issues] a bit. In the mid to long-term, we are very confident Bengaluru will add [Technical Issues] the portfolio.

Sumant Kumar — Motilal Oswal — Analyst

Do you think the occupancy — our company level occupancy will reach at the pre-pandemic level in the coming quarters in Q4?

Sanjay Sethi — Managing Director and Chief Executive Officer

I won’t give you exact numbers, but yes, there’s no reason why we’ll not be hitting the pre-pandemic occupancies.

Sumant Kumar — Motilal Oswal — Analyst

Okay. So, how’s the foreign mix reach there in the pre-pandemic level in the Q4 and what is the current level, the foreign customer mix?

Sanjay Sethi — Managing Director and Chief Executive Officer

Yeah. Look, on the foreign customer mix, as I said, the flights have just been announced. Some of them have started, some are starting from March. Air India has announced multiple flights to East and West Coast. So it will take a little while of time to get the impact in place. But I think this quarter will be a good quarter for Hyderabad and Bangalore.

Sumant Kumar — Motilal Oswal — Analyst

Any color on corporate rate hike negotiated price? Whatever the range you are talking about?

Sanjay Sethi — Managing Director and Chief Executive Officer

It’s very difficult to average that out because each customer client is treated with — in a different fashion depending on the volume of business, etc. But, yeah, we expect healthy growth on the average room rates on the corporate side.

Sumant Kumar — Motilal Oswal — Analyst

Thank you so much, sir.

Operator

Thank you. [Operator Instructions] Our next question is from the line of Pradyumna Choudhary from JM Financial. Please go ahead.

Pradyumna Choudhary — JM Financial — Analyst

Yeah. Hi, sir. So, just wanted to understand, from a longer-term perspective, how do we see ourselves in terms of the mix between our hospitality revenue and commercial revenue over a longer term, say, maybe three, four years down the line?

Sanjay Sethi — Managing Director and Chief Executive Officer

So, what’s going to happen, Pradyumna, is that over the next three or four years, there will be some increase in the share of office revenues, commercial revenues, because there are a couple of large assets coming into play now. And on the hospitality side, we’ll see some addition of a few 100 to 250-odd rooms this year, in the coming year, and the rest a little longer it will take. But by the time we reach fourth, fifth year from now, there’ll stability on the office side, and the growth should kick off on hospitality side fairly aggressively. Overall, we expect maybe about 75% of the business revenue still coming from hospitality at its lowest, and roughly around 65% to 70% of the EBITDA coming from hospitality. But then, that will turn the tide because by then we would have exhausted all the land that’s available for office assets.

Pradyumna Choudhary — JM Financial — Analyst

Okay. So, like beyond that, the focus still remains on the hospitality side with maybe opportunistic forays into commercial ones beyond what we already have planned.

Sanjay Sethi — Managing Director and Chief Executive Officer

Yeah. So, just to sort of take you back a little bit. Our whole entry into office was driven by sweating our real estate assets that we had. And I’ve given example on multiple calls that, for example, that JW Sahar where we have almost 600 rooms, we’re going to build 1,200, but that would have killed the market made our asset unviable. So, we decided to set the asset in a more realistic fashion where we kept the room count at a little under 600 rooms, but we sweated the rest of the FSI and the potential of the land through building complementary assets on the office side, which then creates demand for our hotels. And on the reverse side, the hotel branding creates a halo effect for rental premiums on the office side. So it became complementary, and we are able to sweat the real estate part of it. But once we get done with Powai, Sahar and the Bangalore real estate assets, we really don’t have any more land line with us, which we can monetize through any more office asset. What happens in future is a little unpredictable. If we get a large parcel of the land, we may still do a mixed use. I’m not saying that we won’t, we’ll do what is best for the company. But primarily, reiterating we are a hotel company and thus the growth focus for us.

Pradyumna Choudhary — JM Financial — Analyst

All right. Understood. And secondly, the management contracts that we have with — like with Marriott and Accor, so what is the tenure of these contracts?

Sanjay Sethi — Managing Director and Chief Executive Officer

They range from 10 to 12 to 20 years, and actually couple of them had expired couple of years back, we renewed the Hyderabad one. We use that opportunity to upwardly move the branding for Powai from Renaissance to Westin, which is two notches up. And we’ve got Four Points By Sheraton whose contract has expired, but we’ve got an extension and we’re sort of working on the strategy on how to reposition that asset.

Pradyumna Choudhary — JM Financial — Analyst

If I were to ask you, like in terms of — see, most of many other hotel companies they’re going asset light, so I believe we stand in a good ground, right, like — because there’ll surely be demand for our portfolio even if some of these contracts expire, right? Like, is it a point of strength or a point of weakness in case there is any contract which is nearing expiry? So how do you see it?

Sanjay Sethi — Managing Director and Chief Executive Officer

Great. Great question, Pradyumna. So, I think, yes, you’re right, there is an opportunity there. And I think it’s a point of strength, because the asset is up, right? We can go either way that we want. We are the one that — who have the control on that. And at some point of time, if we decide to create our own brand, that creates an opportunity for us to run our hotels on our own brand, and then maybe if we create the brand, run some hotels for other owners also. But that’s an option open to us. We will — we study those options and we look at what the right strategy for us is. Right now, we are very focused on delivering some of the assets that we’re developing. At the same time, we are building capabilities of running our hotels. As you know, we’ve got the Four Points By Sheraton on franchise. We run the resort in Madh Island. We’ve got the Hyatt Regency that has to be built on franchise. And the Delhi Airport hotel of 400 rooms that we’re building is also in a franchise arrangement. So, clearly we are developing our own in-house operating capabilities. The brand is just one step further from there.

Pradyumna Choudhary — JM Financial — Analyst

All right. Thank you so much. That’s very helpful.

Operator

Thank you very much. Our next question is from the line of Nihal Mahesh Jham from Nuvama. Please go ahead.

Nihal Mahesh Jham — Nuvama — Analyst

Yes. Thank you so much, and good evening. Sir, my first question…

Operator

Mr. Jham, sorry to interrupt. If you’re on speakerphone, can you please use your handset?

Nihal Mahesh Jham — Nuvama — Analyst

Am I audible?

Sanjay Sethi — Managing Director and Chief Executive Officer

We’re hearing a lot of disturbance, background noise, Nihal. You want to come back in the queue in a bit?

Nihal Mahesh Jham — Nuvama — Analyst

I’ll do that, sure. Thank you.

Operator

Thank you. Our next question is from the line of Prateek Kumar from Jefferies. Please go ahead.

Prateek Kumar — Jefferies — Analyst

Yeah. Good evening, sir. My first question is on your cost. So you mentioned about some lumpy cost continuing in your business as well. So, can you quantify that number and what could be this number like going forward as well?

Sanjay Sethi — Managing Director and Chief Executive Officer

Yeah. I’ll have to ask Milind to sort of look up that number, but I think the — let me just dwell a little bit more on those costs that I was talking about. On the repairs and maintenance side, because there’s two, 2.5 years that we had of the pandemic period, we had held back some costs, and we’re sort of getting the hotels back in full shape. So, the FF&E cost that were to be incurred during the period were deferred and they are now being consumed. In the Indian accounting system, we have to move them from FF&E cost to P&L costs, and that’s what’s happened. That’s one.

Second is, with the demand going up and the rates going up so aggressively, it’s extremely important that we put our A game forward. So, we’ve reassessed our requirement for reposition the hotels even from a quality perspective, and so we’ve put in some money behind that. The third area was on the raw material side of hotels. We’ve had a little bit of an increase on cost percentages to revenue in food and beverage. And that’s driven by a slight impact of the inflation that we are all facing at this point of time. And also, we need probably tighten our belts for some of the control systems internally to get that right. So these are the areas that we’re working on.

I must highlight that Milind has already mentioned that we’ve been able to bring the two largest costs down on payroll cost, which is the largest operating cost in our business, were down to 12%, which is a very healthy performance. And on the heat light power or energy or utility costs were at 6%, which is again amongst the industry’s best.

Milind, do you have a number that you want to share?

Milind Wadekar — Chief Financial Officer

Prateek, I mean, our expenses were higher under two hedge, primarily repairs and maintenance, which was higher at around INR4 crores for the quarter, if we compare it with the same quarter of FY ’20. And operating supplies, operating supplies we charge-off to P&L as and when we buy it. So, with the increase in occupancy, some costs hit our P&L, that increase is around INR3 crores. But two major rates we have reduced cost. On HLP side, same-store basis, our HLP cost is lower by INR6 crores for the nine months as compared to nine months of FY ’20.

Sanjay Sethi — Managing Director and Chief Executive Officer

I hope that answers the question for you, Prateek.

Prateek Kumar — Jefferies — Analyst

Yes. So, also can you just revisit again like you mentioned about like now still some rooms left for coming on board like for Mumbai complex. So, how many rooms are still expected to be renovated and how — when is this whole 120 rooms expected to be operational?

Sanjay Sethi — Managing Director and Chief Executive Officer

So, there are 600 rooms in that hotel and 173 service apartments. Out of the 600 rooms, 121 rooms were under renovation. That also meant that the floor under the 121 rooms was used carefully because we didn’t want sound to disturb our guest. So, overall impact of 150 rooms for this quarter. Those 121 rooms have been handed over to operations and they are in the process of nagging and simulating those rooms to open them out to our guests. With that completion, and that will be completed in the next couple of weeks, we’ll be left with only 29 rooms — 29 keys that need to be renovated. We’re not doing it right now because of the occupancy and demand period being high, we’ll probably do it in off-season now.

Prateek Kumar — Jefferies — Analyst

So, for fourth quarter, these 120 rooms should be available for…

Sanjay Sethi — Managing Director and Chief Executive Officer

For about half the fourth quarter, because we’re already at the end of January. And it will take another couple of weeks for them to be activated. So we’re saying by second week of February, they should be all back in action.

Prateek Kumar — Jefferies — Analyst

Thanks. One more question regarding Bangalore market in general upon consumption, is there any trend on like some slowdown because of general IT slowdown in terms of global environment and impacting business, particularly in terms of maybe Bangalore or some other markets in terms of personal consumption because of impact on startup industry and IT industry?

Sanjay Sethi — Managing Director and Chief Executive Officer

Not that we’ve noticed because whilst you’ll see that the Bangalore occupancies are lower, the dates when we didn’t have the holidays, the occupancies were very high, and so are the rates. So we believe that the demand continues to be strong. It is just a holiday season that affected the occupancies and the rates during this period. And again, I want to repeat that the direct US flights will make a lot of difference to Bangalore.

Prateek Kumar — Jefferies — Analyst

So January should be trending like November in that [Speech Overlap].

Sanjay Sethi — Managing Director and Chief Executive Officer

So, January — from January 9 onwards is expected to trend like November. Because the first week again is a slow week because people just come back post New Year holidays, 7th and 8th were the weekends. So post that the picking happens.

Prateek Kumar — Jefferies — Analyst

Okay. And one last question on transient rates. So there will be some portion of your business which will be obviously tied to like [Indecipherable] rates or contractual rates. So, is this transient rate is also benefiting significantly on your like reported rates?

Sanjay Sethi — Managing Director and Chief Executive Officer

Yes, they are. That’s what’s — so the transient contract is what is driving our rates overall up. One, first level is the contracting that has been done at higher rates. Second, because if you haven’t signed up a large delta on the rate side, the [Indecipherable] accounts or the companies don’t get the last room available benefit, in which case they are forced to go to the retail rates, and retail rates are significantly higher than any contracted rates.

Prateek Kumar — Jefferies — Analyst

All right. That answers, sir. Thanks for all the answers. Thank you.

Operator

Thank you very much. [Operator Instructions] We have a question from the line of Rajiv Bharati from DAM Capital. Please go ahead.

Rajiv Bharati — DAM Capital — Analyst

Yeah. Good afternoon, sir. Thanks for the opportunity. Can you spell out what is the INR330 crores capex in the nine months piece-wise where it was and for Q4 how much is due and remaining INR610 crores, similar thing, where it is going towards?

Sanjay Sethi — Managing Director and Chief Executive Officer

Sure. I’ll let Milind answer that question. Go ahead, Milind.

Milind Wadekar — Chief Financial Officer

Yeah, Prateek. Out of this INR330 crores, the major spend was for commercial office space, which we are building in Powai Phase 3 and Bangalore. We have spent some amount on Westin Hotel — New Westin Hotel at Hyderabad. And there was some normal repairs and maintenance capex, which we have incurred.

Rajiv Bharati — DAM Capital — Analyst

Sir, is it possible to quantify the big pieces here, let’s say, Westin Hyderabad?

Milind Wadekar — Chief Financial Officer

INR180 crore was for Powai Phase 3, INR70 crore was for Bangalore, and balance was for hotel projects and hotel rebuilds and innovation.

Sanjay Sethi — Managing Director and Chief Executive Officer

There’s two hotel projects underway, the Novotel Pune with 88 more rooms and the 168-room Hyderabad Hotel.

Rajiv Bharati — DAM Capital — Analyst

Okay. And a similar trajectory is something like INR80 crores will be due for Q4 as well?

Milind Wadekar — Chief Financial Officer

Our capex for next 15 months will be around INR600 crore. Out of INR600 crores, INR335 crores to INR340 crores will be on commercial office space. Hotel side, we will be spending around INR150 crores, and renovation projects, we will be spending around INR125 crores.

Rajiv Bharati — DAM Capital — Analyst

Sure. And to the previous participant’s question, which is, the payroll and the utility cost on the non-hospitality business where it is inching up, till what time should we, let’s say for modeling sake, this will continue at this pace?

Milind Wadekar — Chief Financial Officer

So, in our payroll cost, we have accounted for ESOP expenses, which is as per accounting standards. So now, with this project, it will average it out now, and there won’t be any major increase.

Sanjay Sethi — Managing Director and Chief Executive Officer

We don’t see any increase happening — unusual increase happening on that front, Rajiv.

Rajiv Bharati — DAM Capital — Analyst

So, the payroll expenses on the non-hospitality side, basically I subtracted the employee cost minus, let’s say, the hospitality piece. That number was INR3.5 crores in Q1, then INR6 crores and INR7.6 crores. So I just wanted to know, is it stabilized now at INR7.6 crores or it is going to inch up or — for modeling sake, should we take, let’s say…

Milind Wadekar — Chief Financial Officer

Out of INR7.6 crores, INR3.5 crores are ESOP expenses. So, expenses are almost flat quarter-on-quarter. So if you take out ESOP expenses, which we started accounting in last two quarters, the expenses are flat.

Rajiv Bharati — DAM Capital — Analyst

Sure. And similarly on the utility side, so is it correct to do, let’s say, other expenses minus the hospitality utilities, and that trajectory is basically INR68 crores, INR75 crores, INR82 crores. And you said that this is linked to occupancy. So, if occupancy holds up, this number should not come down, right?

Milind Wadekar — Chief Financial Officer

It is around 6% of revenue, but…

Sanjay Sethi — Managing Director and Chief Executive Officer

No, he’s talking about non-hospitality.

Milind Wadekar — Chief Financial Officer

Yes, you’re right.

Sanjay Sethi — Managing Director and Chief Executive Officer

So, non-hospitality, yes, there will be some increases as office occupancy has got. But remember that we charge this off to the tenants. So, concurrently, the CAM charges will be charged.

Milind Wadekar — Chief Financial Officer

These are pass-throughs. So, only CAM, common area maintenance, charges for non-occupied portion will hit our P&L. Otherwise, it will be passed through and we’ll recover it from tenants.

Rajiv Bharati — DAM Capital — Analyst

And as and when this — let’s say, the dial thing opens up, do you require manpower to be deployed in the next — I mean, to be employed, which are not there in the system as of now as and when it — before the…

Sanjay Sethi — Managing Director and Chief Executive Officer

Very minimal, Rajiv. Maybe some — for the sake of supervision of the project on site for the near future, nothing else because the shell, remember, it’s being built by [Indecipherable]. It’s a shell lease to us. So, the initial next 1.5 years are largely going to go towards building the shell out, our involvement will really come after that. At that point of time, we’ll have a project here, but most of the project costs are kept separately, and we’ve provided for them in our capital budget. In terms of manning the hotel, I think we’ll probably start with very few people six months before opening and then build up a team to come to the opening point. But in the near future, we don’t see any additional happening. In any case, we will continue to stay disciplined on our people to room ratios and make sure the productivity levels are really high.

Milind Wadekar — Chief Financial Officer

Project team salary will be capitalized and it forms part of the capital cost of the project.

Operator

Mr. Nihal Mahesh Jham, your line has been unmuted. If you have a question, please go ahead.

Nihal Mahesh Jham — Nuvama — Analyst

Yes. Am I audible?

Operator

Yes, you are.

Nihal Mahesh Jham — Nuvama — Analyst

Yes, thank you so much. Sir, I had one question on the Bangalore market performance. I do understand you highlighted about there being the impact of holidays, which I think is a phenomenon in Q3 of every year in a way. So, if I have to compare the Bangalore market streak over occupancy versus this one, would you attribute the lower occupancy primarily, say, to lesser number of foreign guests coming in because you’ve alluded to that fact quite a lot in the discussion?

Sanjay Sethi — Managing Director and Chief Executive Officer

So, two things, as I said earlier. It is a combination of the holidays. With the Diwali and Dussehra both being mid-week and because both these holidays impact foreigners coming in here, because they know there’s very little work that happens in Banglore, and the share of the big ticket event in Bangalore, and both happen on the same month. That’s what impacted the month. And of course, the foreign travel not being back to normal, it did impacted a bit. But the periods where in the same month when we had a clear period, we saw the occupancies go extremely high and the rates are very high also. So, I think it’s more of a phenomena of the holidays than majority of the impact coming from foreign traffic.

Nihal Mahesh Jham — Nuvama — Analyst

That’s helpful. And just a last related follow-up was that, overall if you look at across your properties and for the market, fair to say the domestic corporate travel for you has more or less completely come back and foreign travelers you said is something that you expect currently at 70%, 80% inches to that 100%. Is that the right situation in the markets in terms of overall corporate recovery?

Sanjay Sethi — Managing Director and Chief Executive Officer

Yeah. So, I think the reality today is that domestic business travel is actually 53% higher than pre-pandemic, and the foreign travel is at 70% of pre-pandemic. And that combined together is leading towards the results we’re getting. And we believe as an international travel comes in, it will lead to natural movement towards high paying guests, whichever segment they come from, to make sure we optimize our revenues.

Nihal Mahesh Jham — Nuvama — Analyst

Got that. That’s very helpful. Thank you so much, and I wish you all the best.

Operator

Thank you very much. Our next question is a follow up from the line of Pradyumna Chaudhary from JM Financial. Please go ahead.

Pradyumna Choudhary — JM Financial — Analyst

Thank you for the follow-up. So, just another question related to — basically how do we go like what criteria do we have when we choose to go for a project in terms of the kind of range of IRR or return or payback period we normally target?

Sanjay Sethi — Managing Director and Chief Executive Officer

Sure. So, Pradyumna, in terms of hospitals — our hotel projects, we look at three or four — two or three metrics actually. One of course is the overall project IRR, and there we look at mid-teens and upwards. On equity IRRs, we look at 20 and upwards. On the return on capital employed in the third year, which is a stable year, we look at least 12%. And the fourth one is that it has to be MPV accretive for us. So these are the four parameters that we look at. We also, of course, look at various other parameters like depth of market, the ability to get to run an efficient operation, the size of the competition and all of that. But the key financial parameters, if we look at, are the force [Phonetic] that I shared with you earlier.

Milind Wadekar — Chief Financial Officer

Pradyumna, Milind here, we also look at whether it is EPS accretive or not and it’s stabilized.

Pradyumna Choudhary — JM Financial — Analyst

All right. So, basically the IRR — equity IRR, say what was the number you think?

Sanjay Sethi — Managing Director and Chief Executive Officer

So we said at the third year, which is the first table here, full year, we look at, at least 12% EBIT by capital employed.

Pradyumna Choudhary — JM Financial — Analyst

Okay. Understood. And I understand that right now we only have like a commercial portfolio in terms of the hotels like no leisure. And previously, I think you guys have mentioned that you will be open to having something in Goa or somewhere. So, like what is the idea like over the longer term again, is it something where we look at a more diversified mix or is it something where it would be again more focused on the non-leisure side?

Sanjay Sethi — Managing Director and Chief Executive Officer

So, we’ve — our strategy, mid-term strategy right now is to diversify the portfolio, get some leisure assets in. We do believe that the majority of the assets will continue to be in the big city, big box hotels, but we do want sort of a maybe 25%, 30% of the room inventory coming from leisure. So we derisk ourselves from cycles where business travel doesn’t happen. And add to that the diversification on the asset class, which is the office side of the business, which allows us steady annuity income. So that combined together will, I think, give us the ideal mix.

Pradyumna Choudhary — JM Financial — Analyst

All right. Understood. Thank you.

Operator

Thank you. Our next question is from the line of Vikas Ahuja from Antique Stockbroking. Please go ahead.

Vikas Ahuja — Antique Stockbroking Limited — Analyst

Yeah, hi. Sir, just one thing, just trying to understand that after all the commercial portfolio coming in maybe, but we would be exhausting most of our land parcel and [Technical Issue] property, but half yearly growth beyond that maybe up FY ’26 or after, I know maybe daily property will come maybe a year later, but how should we look at our strategy of growth afterwards after exhausting the land parcel?

Sanjay Sethi — Managing Director and Chief Executive Officer

So, Vikas, we are a growth-oriented company. And just because we finished the current pipeline of project doesn’t mean that we’re not going to look for more projects. Our balance sheet will enable us to deploy more capital within the not-too-distant future. And we’d like to look for more opportunities to grow the portfolio. As I said, in terms of the mix of the assets that we like, we think business — hotels at the upper upscale luxury positioning in big cities will probably go to be the sweet spot for us. We will get a leisure portfolio in play at some point of time, and the business — the office assets will be there. In addition to that, if we get any M&A opportunities in the market from a platform of hotels, we are open to considering those also. Right now, there’s nothing that we think which is viable. But if that comes our way, we would like to look at that. Let me sum it up by saying that the growth, which will be practical but aggressive as a strategy will continue.

Vikas Ahuja — Antique Stockbroking Limited — Analyst

Okay. Thank you.

Operator

Thank you very much. As there are no further questions, I would now like to hand the conference over to Mr. Sanjay Sethi for closing comments.

Sanjay Sethi — Managing Director and Chief Executive Officer

Thank you so much. Before we end, we’d like — all of us here would like to wish you and your dear ones a brilliant 2023, and we look forward to engaging with you more this year. Thank you.

Milind Wadekar — Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]